In general, 401(k) plans must be tested annually to demonstrate that they do not discriminate in favor of highly compensated employees, or provide benefits that exceed certain statutory or regulatory limits. If a plan “fails” any of the required tests, the plan sponsor must take corrective actions, and there are established deadlines for correcting certain failures. The following is a brief summary of these deadlines:
Note: Deadlines are based on a calendar year.
• March 15th – Deadline for issuing corrective distributions to correct ADP/ACP testing failures for non-safe harbor 401(k) plans.
In general, corrective distributions must be issued within 2 ½ months following the close of the plan year to avoid a 10% excise tax imposed on the excess amounts. Plan sponsors of 401(k) plans that include an “eligible automatic contribution arrangement” have up to 6 months to issue corrective distributions without incurring the excise tax.
In either situation, correct distributions must be issued no later than the last day of the plan year following the plan year in which the testing failure occurred to protect the qualified status of the plan.
• April 15th – Due date for issuing corrective distributions for excess deferrals (i.e. participant deferrals made in excess of 402(g) limit – $18,500 for 2018). If the excess amount, plus related earnings, is not distributed by this date, the participant is in effect taxed on the excess amount twice, both in the year the excess occurred and the year of the distribution. (Note: This deadline is the same, regardless of plan year).
• June 30th – Extended due date for issuing corrective distributions for ADP/ACP testing failures under “eligible automatic contribution arrangement” 401(k) plans; the 10% excise tax applies to distributions made after this date.
• October 15th – Deadline for adopting a retroactive plan amendment to correct a coverage or nondiscrimination testing failure (if applicable). The amendment must be adopted no later than 9 ½ months following the close of the plan year in which
the failure occurred, as provided for under the applicable regulations.
• December 31st – Final deadline for issuing corrective distributions for ADP/ACP testing failures for the prior year (or for making a QNEC/QMAC to correct the failure).
The deadlines 401(k) plan sponsors must observe are numerous and complex; the deadlines listed above are not meant to be comprehensive, but rather, represent critical dates related to the correction of specific plan testing failures.
Please contact us to learn more about how these rules impact your plan and participants!